<PAGE>   1
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   ----------

                                   FORM 10-QSB

    [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934


                  FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1999

                                       OR

    [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                  FOR THE TRANSITION PERIOD FROM _____ TO _____


                         Commission file number 0-24871

                                  FATBRAIN.COM
        (Exact name of small business issuer as specified in its charter)

               DELAWARE                                     77-0389480
     (State or other jurisdiction of                      (I.R.S. Employer
     incorporation or organization)                      Identification Number)


                               1308 ORLEANS DRIVE
                           SUNNYVALE, CALIFORNIA 94089
                    (Address of principal executive offices)


                                 (408) 541-2020
                (Issuer's telephone number, including area code)



        Indicate by check X whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days

                      (1)        Yes       [X]                No       [ ]
                      (2)        Yes       [X]                No       [ ]

        As of April 30, 1999 there were 11,251,939 shares of the Registrant's
common stock outstanding.

================================================================================

<PAGE>   2

                               FATBRAIN.COM, INC.

                                   FORM 10-QSB

                                      INDEX



<TABLE>
<CAPTION>
PART I.    FINANCIAL INFORMATION                                                          PAGE
                                                                                          ----
<S>        <C>                                                                            <C>
Item 1.    Financial Statements............................................................ 3

           Condensed Balance Sheets at January 31, 1999 and April 30, 1999................. 3

           Condensed Statements of Operations and Comprehensive Loss for the Quarters
           ended April 30, 1998 and April 30, 1999 ........................................ 4

           Condensed Statements of Cash Flows for the Quarters ended April 30, 1998
           and April 30, 1999.............................................................. 5

           Notes to Condensed Financial Statements......................................... 6

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of
           Operations...................................................................... 8


PART II.   OTHER INFORMATION...............................................................23

Item 1.    Legal Proceedings...............................................................23

Item 2.    Changes in Securities and Use of Proceeds.......................................23

Item 3.    Defaults upon Senior Securities.................................................23

Item 4.    Submission of Matters to a Vote of Security Holders.............................23

Item 5.    Other Information...............................................................23

Item 6.    Exhibits and Reports on Form 8-K................................................23

SIGNATURES ................................................................................24
</TABLE>



                                       2
<PAGE>   3

PART I.   FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS

                               FATBRAIN.COM, INC.
                            CONDENSED BALANCE SHEETS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                 January 31,     April 30,
                                                                    1999           1999
                                                                 -----------    -----------
ASSETS                                                                          (unaudited)
<S>                                                              <C>            <C>
Current assets:
    Cash and equivalents                                          $  9,341       $  6,922
    Short-term investments                                           5,344          1,033
    Accounts receivable, net of allowance of $161 and $210           1,268          1,368
    Inventories                                                      3,204          5,492
    Prepaid expenses and other current assets                        1,068          1,767
                                                                  --------       --------
      Total current assets                                          20,225         16,582

Property and equipment, net                                          2,097          3,383
Investments                                                         14,181         14,108
Goodwill, net                                                        2,751          2,700
Other assets                                                           360            412
                                                                  --------       --------
      Total assets                                                $ 39,614       $ 37,185
                                                                  ========       ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                              $  1,896       $  4,205
    Accrued expenses                                                 1,169          1,593
    Current portion of capital lease obligations                        18             18
                                                                  --------       --------
      Total current liabilities                                      3,083          5,816
Capital lease obligations                                               35             31
                                                                  --------       --------
      Total liabilities                                              3,118          5,847
Stockholders' equity:
    Preferred stock, $0.001 par value, 5,000 authorized,
      none issued and outstanding                                     --             --
    Common stock, $0.001 par value, 50,000 and 50,000
      shares authorized, 11,172 and 11,252 shares issued and
      outstanding at January 31, 1999 and April 30, 1999,
      respectively                                                      11             11
    Additional paid-in capital                                      50,270         50,326
    Warrants                                                            12             12
    Unrealized loss on investments                                     (47)           (51)
    Accumulated deficit                                            (13,750)       (18,960)
                                                                  --------       --------
      Total stockholders' equity                                    36,496         31,338
                                                                  --------       --------
      Total liabilities and stockholders' equity                  $ 39,614       $ 37,185
                                                                  ========       ========
</TABLE>


           See accompanying notes to condensed financial statements.



                                       3
<PAGE>   4

                               FATBRAIN.COM, INC.
            CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                               Quarter ended April 30,
                                                               -----------------------
                                                                 1998           1999
                                                               --------       --------
Revenues:                                                            (unaudited)
<S>                                                            <C>            <C>
     Online                                                    $  1,761       $  4,491
     Retail and other                                             2,633          1,652
                                                               --------       --------
        Total revenues                                            4,394          6,143
Cost of revenues:
     Online                                                       1,326          3,643
     Retail and other                                             1,688          1,071
                                                               --------       --------
        Total cost of revenues                                    3,014          4,714
                                                               --------       --------
Gross profit                                                      1,380          1,429
Operating expenses:
     Sales and marketing                                          1,986          4,670
     Development and engineering                                    554          1,120
     General and administrative                                     543          1,178
                                                               --------       --------
        Total operating expenses                                  3,083          6,968
                                                               --------       --------
Loss from operations                                             (1,703)        (5,539)
Interest, net                                                        32            329
                                                               --------       --------
Net loss                                                         (1,671)        (5,210)
Other comprehensive loss - unrealized loss on investments          --               (4)
                                                               --------       --------
Comprehensive loss                                             $ (1,671)      $ (5,214)
                                                               ========       ========
Basic and diluted net loss per share                           $  (1.09)      $  (0.46)
                                                               ========       ========
Shares used in calculating basic and diluted
    net loss per share                                            1,527         11,225
                                                               ========       ========
</TABLE>


           See accompanying notes to condensed financial statements.



                                       4
<PAGE>   5

                               FATBRAIN.COM, INC.
                       CONDENSED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                         Quarter ended April 30,
                                                                         -----------------------
                                                                           1998           1999
                                                                         --------       --------
Cash from operating activities:                                                (unaudited)
<S>                                                                      <C>            <C>
   Net loss                                                               $(1,671)      $(5,210)
   Adjustments to reconcile net loss to net cash used in operations:
      Depreciation and amortization                                           107           235
      Options and warrants granted to consultants and creditor                  5          --
      Amortization of premium on investments                                 --              91
   Changes in current assets and liabilities:
      Accounts receivable                                                    (393)         (100)
      Inventories                                                             326        (2,288)
      Prepaid expenses and other assets                                        63          (762)
      Accounts payable                                                     (1,047)        2,309
      Accrued expenses                                                         (8)          424
                                                                          -------       -------
      Net cash used in operations                                          (2,618)       (5,301)

Cash from investing activities:
      Purchase of property and equipment                                     (243)       (1,459)
      Sale of investments                                                    --           4,289
                                                                          -------       -------
      Net cash (used in)/provided by investing activities                    (243)        2,830

Cash from financing activities:
      Repayment of capital lease obligation                                    (4)           (4)
      Issuance of preferred stock, net                                         25
      Exercise of stock options                                              --              56
                                                                          -------       -------
      Net cash provided by financing activities                                21            52
                                                                          -------       -------

Net decrease in cash and equivalents:                                      (2,840)       (2,419)
      Cash and equivalents at beginning of period                           4,974         9,341
                                                                          -------       -------
      Cash and equivalents at end of period                               $ 2,134       $ 6,922
                                                                          =======       =======

Non-cash investing activity:
      Unrealized loss on investments                                         --              (4)

Supplemental disclosure of cash flow information:
      Cash paid for interest                                                    2             1
      Cash paid for income tax                                               --            --
</TABLE>


           See accompanying notes to condensed financial statements.



                                       5
<PAGE>   6

                               FATBRAIN.COM, INC.

                     NOTES TO CONDENSED FINANCIAL STATEMENTS


1.  BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

    Description of Business and Basis of Presentation

        Fatbrain.com, Inc., formerly Computer Literacy, Inc., (the "Company")
    was incorporated in California in November 1994 and reincorporated in
    Delaware in May 1998. The Company is an online retailer of professional
    books, technology based training solutions, product manuals, research
    reports and other information resources, all of which are targeted to
    business and technical professionals. Business is transacted through the
    Company's online store or through its two physical retail locations. On
    March 29, 1999, the Company changed its name to Fatbrain.com, Inc.

    Unaudited Interim Financial Information

        The condensed financial statements of Fatbrain.com, Inc. included herein
    are unaudited and reflect all adjustments (consisting only of normal
    recurring adjustments) which are, in the opinion of management, necessary
    for a fair presentation of the financial position and operating results for
    the quarters ended April 30, 1998 and April 30, 1999. These financial
    statements should be read in conjunction with the Company's audited
    financial statements as of January 31, 1999 and for the year then ended and
    notes thereto included in the Company's April 16, 1999 filing on Form
    10-KSB. The results of operations for the quarter ended April 30, 1999 are
    not necessarily indicative of the results to be expected for any subsequent
    quarter or for the year ending January 31, 2000.

2.  COMMITMENTS AND CONTINGENCIES

        In April 1999 the Company entered into a three (3) year sub-lease for a
    40,000 square foot distribution facility in Erlanger, Kentucky. The Company
    will occupy approximately 20,000 square feet of the facility and plans to
    sub-lease the remaining 20,000 square feet for one to two years. Future
    minimum lease commitments under the new lease are as follows: fiscal 2000:
    $110,000; fiscal 2001: $175,000; fiscal 2002: $181,000; and fiscal 2003:
    $30,000.

3.  SEGMENT INFORMATION

         On January 31, 1999, the Company adopted SFAS No. 131, "Disclosures
    About Segments of an Enterprise and Related Information," which established
    standards for reporting information about operating segments in annual
    financial statements, along with related disclosures about products and
    services, geographic areas, and major customers. The information for the
    quarter ended April 30, 1998 has been reclassified from the prior year's
    presentation to conform to the presentation for the quarter ended April 30,
    1999.

             Operating segments are defined as components of an enterprise about
    which separate financial information is available that is evaluated
    regularly by the Company's chief operating decision maker. By this
    definition, Fatbrain.com has three operating segments: internet commerce,
    retail stores, and online advertising. The segments presented here are those
    that were presented in the Company's filing on form 10-KSB for the year
    ended January 31, 1999, with the addition of the online advertising segment.
    These segments are differentiated based upon one of two criteria: the
    methods used to distribute product, or the nature of the product or service
    provided. For the internet commerce segment, products are ordered via the
    Company's web site and mailed directly to the customer through the Company's
    distribution system. The retail stores maintain inventory within the store
    in a traditional retail environment. These operating segments had similar
    product offerings in the quarter ended April 30, 1999. The online
    advertising segment generates revenue through the sale of advertising space
    on the Company's website. The Company began generating online advertising
    revenues in the quarter ended April 30, 1999. Unallocated revenues are
    generated primarily from trade shows and book fairs.



                                       6
<PAGE>   7

    The Company evaluates segment performance based on gross profit. The Company
does not analyze the segments individually below the gross profit line. Direct
operating expenses are those directly related to the operating segment (for
example, direct salaries, rent, etc.) and exclude all corporate office expenses.
Segment assets are not presented as all assets of the Company are commingled and
are not available by segment. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies.

SEGMENT CONTRIBUTION

<TABLE>
<CAPTION>
                                          QUARTER ENDED APRIL 30,
                                          1998              1999
                                         -------           -------
                                              (in thousands)
<S>                                      <C>               <C>
Revenues (1):
  Internet commerce                      $ 1,761           $ 4,206
  Retail stores                            2,630             1,619
  Online advertising                          --               285
  Unallocated                                  3                33
                                         -------           -------
     Consolidated net revenues             4,394             6,143

Gross profit (1):
  Internet commerce                          435               563
  Retail stores                              965               569
  Online advertising                          --               285
  Unallocated                                (20)               12
                                         -------           -------
      Consolidated margin                  1,380             1,429

Contribution (2):
  Internet commerce                           27              (644)
  Retail stores                              321               167
  Online advertising                          --               285
  Unallocated                                (21)               (9)
                                         -------           -------
      Consolidated contribution          $   327           $  (201)
                                         =======           =======
</TABLE>

(1) The presentation of revenues and gross profit is consistent with the
    Company's internal presentation of financial information to management.

(2) Contribution is defined as gross profit, less direct operating expenses.

RECONCILIATION OF CONTRIBUTION TO NET LOSS

<TABLE>
<S>                                      <C>               <C>
Consolidated Contribution                $   327           $  (201)
Interest income, net                          32               329
Indirect expenses                         (2,030)           (5,338)
                                         -------           -------
Net loss                                 $(1,671)          $(5,210)
                                         =======           =======
</TABLE>

    Geographic information. International sales, measured as shipments to
addresses outside the United States were 8% of total revenues for the quarter
ended April 30, 1998 and 12% of total revenues for the quarter ended April 30,
1999. No foreign country or geographical area accounted for more than 10% of
revenue in any of the periods presented.

    Major customers. No individual customer accounted for 10% or more of the
Company's consolidated revenues for the quarters ended April 30, 1998 and 1999.



                                       7
<PAGE>   8

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

        The discussion in this Report contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in "Risk
Factors That May Affect Future Results" as well as those discussed in this
section and elsewhere in this Report, and the risks discussed in the "Risk
Factors" section included in the Company's Registration Statement on Form SB-2
as declared effective by the Securities and Exchange Commission on November 19,
1998 (Reg. No. 333-67397).

OVERVIEW

        Fatbrain.com is the leading online retailer of information resources
singularly focused on technical and business professionals. With over 300,000
information resource titles from more than 8,000 publishers, Fatbrain.com offers
its customers online access to a broad and comprehensive selection of technical
and professional books, technology based training solutions, product manuals,
research reports and other information resources. In addition to the Company's
extensive product offering, Fatbrain.com's online store features authoritative
and compelling content, competitive pricing, an easy-to-use navigational
interface and a variety of value-added services. The Company also operates two
physical retail stores that complement its online business by generating
increased online traffic and creating cross-promotional opportunities, thereby
providing a profitable means of customer acquisition.

        Incorporated in November 1994, the Company (formerly Computer Literacy,
Inc.) began selling technical books in February 1996, technology based training
solutions in January 1998, product manuals in May 1998, research reports in June
1998, and professional resources for the engineering, science, mathematics and
financial services industries in March 1999. Fatbrain.com generates revenues
from sale of these products through its online store, certain co-branded
corporate online stores and its two retail locations as well as through trade
shows and book fairs. The Company recognizes revenue from its online store upon
shipment and, from its physical retail stores, trade shows and book fairs, at
the time of sale. In the quarter ended April 30, 1999, the Company generated
additional revenue by selling advertising space on its web site.

        Cost of revenues includes costs of products and inbound and outbound
freight. These costs may vary as a percentage of total revenues in any given
period due to a number of factors, including increased price competition, varied
levels of cooperative advertising dollars received from certain publishers of
books, changes in the size and timing of discounts and other promotional
activities, and changes in product mix. For the quarter ended April 30, 1998 and
the quarter ended April 30, 1999, the Company purchased approximately 38% and
40%, respectively, of its books from Ingram, an indirect reseller. Although the
primary advantage associated with purchasing from Ingram is just in time
inventory management, the Company believes it will make a larger number of its
purchases directly from publishers as its sales volume increases, thereby
enabling the Company to take advantage of favorable volume discounts. For the
quarter ended April 30, 1999 the Company purchased approximately 20% of its
books from Pearson Education Division.

        Since inception, the Company has incurred significant net operating
losses and expects to incur additional net operating losses for the foreseeable
future. There can be no assurance that the Company will achieve profitability or
that, if profitability is achieved, it will be sustained. As of April 30, 1999,
the Company had an accumulated deficit of $19.0 million. The Company believes
that its success will depend in large part on its ability to enhance its
customers' online shopping experience, expand corporate relationships, build
brand awareness, encourage customer loyalty, capitalize on the market for
information resources, establish and leverage supplier relationships, maintain
its technical focus and expand its expertise in the engineering, science,
mathematics and financial services industries. Accordingly, the Company intends
to invest heavily in marketing and promotion, its direct sales and telesales
organizations, and infrastructure development. There can be no assurance that
such expenditures will result in increased revenues or customer growth.
Additionally, while in recent periods the Company has experienced significant
growth in revenues, its customer base and repeat customer revenue, such growth
rates are not sustainable, will decrease in the future and are not indicative of
actual growth rates that the Company may experience. In view of the rapidly
evolving nature of the Company's business and its limited operating history, the
Company believes that period-to-period comparisons of its operating results,
including the Company's operating expenses as a percentage of total revenues,
are not necessarily meaningful and should not be



                                       8
<PAGE>   9

relied upon as an indication of future performance. See "Risk Factors -- Limited
Operating History; Accumulated Deficit; Anticipated Losses."

RESULTS OF OPERATIONS

        The following table presents the Company's results of operations as a
percentage of total revenues for the periods indicated.

<TABLE>
<CAPTION>
                                        Quarter ended April 30,
                                        -----------------------
                                         1998            1999
                                        ------          -------
<S>                                     <C>             <C>
Revenues:
     Online                               40.1%           73.1%
     Retail and other                     59.9            26.9
                                        ------          ------
        Total revenues                   100.0           100.0
Cost of revenues (1):
     Online                               75.3            81.1
     Retail and other                     64.1            64.8
                                        ------          ------
        Total cost of revenues            68.6            76.7
                                        ------          ------
Gross profit                              31.4            23.3
Operating expenses:
     Sales and marketing                  45.2            76.1
     Development and engineering          12.6            18.2
     General and administrative           12.4            19.2
                                        ------          ------
        Total operating expenses          70.2           113.5
                                        ------          ------
   Loss from operations                  (38.8)          (90.2)
   Interest, net                           0.7             5.4
                                        ------          ------
   Net loss                              (38.0)%         (84.8)%
                                        ======          ======
</TABLE>

(1) Cost of online revenue and cost of retail and other revenue are shown as a
percentage of related online revenue and retail and other revenue, respectively.

QUARTER ENDED APRIL 30, 1998 COMPARED TO QUARTER ENDED APRIL 30, 1999

        Online Revenue. Online revenue is comprised of revenue from online sales
of information resources, associated outbound shipping charges, net of returns
and, to a lesser extent, the sale of advertising space on the Company's web
site. Online revenue increased from $1.8 million, or 40.1% of total revenues in
the quarter ended April 30, 1998, to $4.5 million, or 73.1% of total revenues in
the quarter ended April 30, 1999 primarily as a result of significant increases
in the customer base (from 29,115 to 103,057), and repeat purchases from the
Company's existing customers.

        International sales represented approximately 19% and 17% of online
revenue for the quarter ended April 30, 1998 and the quarter ended April 30,
1999, respectively.

        Retail and Other Revenue. Retail and other revenue is comprised
primarily of revenue generated by the Company's physical retail stores and, to a
lesser extent, by trade shows and book fairs. Retail and other revenue decreased
from $2.6 million, or 59.9% of total revenues for the quarter ended April 30,
1998, to $1.7 million, or 26.9% of total revenues in the quarter ended April 30,
1999 primarily as a result of an increased focus of our sales and marketing on
the online business, as well as the closure of two retail stores, located in
Cupertino, California and Vienna, Virginia, at the end of fiscal 1999. The
Company periodically evaluates the location and productivity of its retail
stores and may close, consolidate or relocate stores as conditions warrant. Any
closure, consolidation or relocation of a retail store is likely to decrease
retail and other revenue.

        Cost of Online Revenue. Cost of online revenue is comprised primarily of
the cost of merchandise sold through the Company's online store and associated
inbound and outbound shipping costs. Cost of online revenue



                                       9
<PAGE>   10

increased from $1.3 million, or 75.3% of online revenue for the quarter ended
April 30, 1998, to $3.6 million, or 81.1% of online revenue in the quarter ended
April 30, 1999. The increase in absolute dollars was attributable to increased
online sales volume.

        Cost of Retail and Other Revenue. Cost of retail and other revenue is
comprised of the cost of merchandise sold through the Company's retail stores
and at trade shows and book fairs and includes associated inbound and outbound
shipping costs. Cost of retail and other revenue decreased from $1.7 million, or
64.1% of retail and other revenue in the quarter ended April 30, 1998, to $1.1
million, or 64.8% of retail and other revenue in the quarter ended April 30,
1999 primarily as a result of the decrease in retail and other sales.

        Gross Profit. Gross profit as a percentage of total revenues decreased
from 31.4% in the quarter ended April 30, 1998 to 23.3% in the quarter ended
April 30, 1999. The percentage decrease was primarily a result of the increase
in online sales as a percent of total revenues, as well as the implementation by
the Company of an online competitive pricing policy. The Company has offered,
and expects to continue to offer in the foreseeable future, discounts on various
product offerings to encourage new customers and online traffic. Such pricing
pressure is likely to reduce gross margins in the future but may be partially
offset by the change in mix of products sold towards higher margin technology
based training materials, product manuals and research reports.

        Sales and Marketing Expenses. Sales and marketing expenses consist of
direct expenses associated with the Company's retail stores, as well as
advertising, promotional and public relations expenditures, payroll and related
expenses for personnel engaged in corporate sales, marketing and fulfillment.
Sales and marketing expenses increased from $2.0 million, or 45.2% of total
revenues in the quarter ended April 30, 1998, to $4.7 million, or 76.1% of total
revenues in the quarter ended April 30, 1999. The increase in absolute dollars
was primarily attributable to the expansion of the Company's online store and
its direct sales force, plus an increase in advertising, branding, public
relations and other promotional expenditures to support the Company's name
change. Further, the increase was also due to the increased personnel and
related expenses required to implement the Company's marketing strategy and
fulfill customer demand. The Company intends to pursue aggressive branding,
marketing and telesales campaigns to generate increased online traffic and
acquire customers. Accordingly, the Company expects sales and marketing expenses
to increase in absolute dollars for the foreseeable future, but decrease as a
percentage of total revenues as total revenues increase.

        Development and Engineering Expenses. Development and engineering
expenses primarily consist of costs associated with systems and
telecommunications infrastructure, editorial operations and content acquisition.
Development and engineering expenses increased from $554,000, or 12.6% of total
revenues in the quarter ended April 30, 1998, to $1.1 million, or 18.2% of total
revenues in the quarter ended April 30, 1999. The increase in absolute dollars
was primarily attributable to increased staffing and associated costs related to
enhancing the features, content and functionality of the Company's online store
and transaction-processing systems, as well as increased investments in systems
and telecommunications infrastructure. To date, all development and engineering
costs have been expensed as incurred. The Company believes that continued
investment in systems and infrastructure development is critical to attaining
its strategic objectives and, as a result, expects development and engineering
expenses to increase significantly in absolute dollars for the foreseeable
future, but decrease as a percentage of total revenues as total revenues
increase.

        General and Administrative Expenses. General and administrative expenses
consist of payroll and related costs associated with executive, accounting and
administrative personnel, recruiting, professional service fees and other
general corporate expenses. General and administrative expenses increased from
$543,000, or 12.4% of total revenues in the quarter ended April 30, 1998, to
$1.2 million or 19.2% of total revenues in the quarter ended April 30, 1999.
This increase in absolute dollars was primarily due to increased salaries and
related expenses associated with the hiring of additional personnel and
increases in professional fees. The Company expects general and administrative
expenses to increase in absolute dollars as the Company expands its staff and
incurs additional costs related to the expansion of its business and the costs
resulting from being a public company, but decrease as a percentage of total
revenues as total revenues increase.

        Interest, Net. Net interest income increased from $32,000 in the quarter
ended April 30, 1998, to $329,000 in the quarter ended April 30, 1999 due to
interest earned on the remaining proceeds from the Company's initial public
offering in November 1998.



                                       10
<PAGE>   11

RECENT DEVELOPMENTS


        In April 1999 the Company entered into a three (3) year sub-lease for a
40,000 square foot distribution facility in Erlanger, Kentucky. The Company will
occupy approximately 20,000 square feet of the facility and plans to sub-lease
the remaining 20,000 square feet for one to two years. Future minimum lease
commitments under the new lease are as follows: remaining fiscal 2000: $110,000;
fiscal 2001: $175,000; fiscal 2002: $181,000; and fiscal 2003; $30,000. The
Company moved the warehousing and fulfillment of orders to Kentucky in May 1999
in order to be closer to certain publishers, wholesalers, distributors and
delivery services. At the same time the Company moved from a manual distribution
process to a software supported solution from Manhattan Associates, PKMS
Warehouse Management System.

LIQUIDITY AND CAPITAL RESOURCES

        Since inception, the Company has financed its operations primarily
through private sales of preferred stock which totaled approximately $19.3
million (net of issuance costs), and public sale of common stock in its initial
public offering in November 1998 which totaled approximately $30.8 million net
of issuance costs.

        Net cash used in operating activities was $2.6 million in the quarter
ended April 30, 1998 and $5.3 million in the quarter ended April 30, 1999. Cash
used in operating activities in the quarter ended April 30, 1998 was primarily
attributable to a net loss of $1.7 million and increases of $393,000 in accounts
receivable, and decreases of $1.0 million in accounts payable, partially offset
by a decrease of $326,000 in inventories, as well as depreciation and
amortization. For the quarter ended April 30, 1999, cash used in operating
activities primarily resulted from a net loss of $5.2 million plus increases of
$2.3 million in inventories, and $762,000 in prepaid expenses and other assets,
offset by increases in accounts payable and accrued expenses of $2.3 million and
$424,000, respectively, as well as depreciation and amortization of $235,000.

        Net cash used in investing activities was $243,000 in the quarter ended
April 30, 1998, and was attributable to purchases of property and equipment. Net
cash provided by investing activities was $2.8 million in the quarter ended
April 30, 1999. Net cash provided by investing activities was attributable to
$4.3 million in sales of investments, offset by $1.5 million used to purchase
property and equipment.

        Cash provided by financing activities was $21,000 in the quarter ended
April 30, 1998 and $52,000 in the quarter ended April 30, 1999. The Company has
a $4.0 million line of credit which expires on December 31, 1999. As of April
30, 1999, the Company has no borrowings outstanding under its line of credit.

        As of April 30, 1999 the Company had $6.9 million of cash and
equivalents. As of that date, the Company's principal commitments consisted of
obligations outstanding under an agreement with CBT Systems, Ltd. and operating
and capital leases. Although the Company has no material long-term commitments
for capital expenditures, it anticipates a substantial increase in its capital
expenditures and lease commitments consistent with anticipated growth in
operations, infrastructure and personnel.

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

        The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks. These risks should be read in
conjunction with the "Risk Factors" section included in the Company's
Registration Statement on Form SB-2 as declared effective by the Securities and
Exchange Commission on November 19, 1998 (Reg. No. 333-67397).

LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT; ANTICIPATED LOSSES

        We were incorporated in November 1994 to develop an online retail
strategy and we began selling information resources, initially consisting of
technical books, through our online store on the World Wide Web (the "Web") in
February 1996. We expanded our product offerings to include training materials
in January 1998, product manuals in May 1998, research reports in June 1998 and
professional resources for the engineering, science,



                                       11
<PAGE>   12

mathematics and financial services industries in March 1999. Accordingly, we
have a very limited operating history from which to evaluate our business and
prospects.

        Our prospects must be considered in light of the risks, expenses and
uncertainties frequently encountered by companies in the early stages of
development, particularly companies in new and rapidly evolving markets such as
electronic commerce. Such risks for us may include:

            -   An evolving and unpredictable business model;

            -   Management of an expanding business;

            -   Fluctuations in sales;

            -   Seasonality;

            -   Entry into new business areas;

            -   Competition;

            -   Need for additional personnel and dependence on key personnel;

            -   Limitations on our ability to establish and expand our brand;

            -   Capacity constraints;

            -   Systems failures;

            -   Announcements by current or potential competitors;

            -   Changes in the needs of technical and business professionals;
                and

            -   The other Risk Factors discussed herein.

        To address these risks, we must, among other things:

            -   Implement and successfully execute our business and marketing
                strategy;

            -   Maintain and increase our customer base;

            -   Continue to develop and upgrade our technology and
                transaction-processing systems;

            -   Improve our online store;

            -   Provide superior customer service and order fulfillment;

            -   Respond to competitive developments; and

            -   Attract, retain and motivate qualified personnel.

        We may not be successful in addressing such risks, and the failure to do
so would seriously harm our business, financial condition, results of
operations, and cash flows.

        Since inception, we have incurred significant net operating losses and
expect to incur additional net operating losses for the foreseeable future. We
may not achieve profitability and if achieved, profitability may not be
sustained. As of April 30, 1999, we had an accumulated deficit of $19.0 million.
We believe that our success will depend in large part on our ability to:

            -   Enhance our customers' online shopping experience;

            -   Expand corporate relationships;

            -   Build brand awareness;

            -   Encourage customer loyalty;

            -   Capitalize on the market for information resources;

            -   Establish and utilize supplier relationships;

            -   Maintain our technology focus and expertise; and

            -   Expand our expertise in the engineering, science, mathematics
                and financial services industries.

        Accordingly, we intend to invest heavily in marketing and promotion, our
direct sales and telesales organizations, and systems and infrastructure
development. Such expenditures may not result in increased revenues or customer
growth. Additionally, while in recent periods we have experienced significant
growth in revenues, our customer base and repeat customer revenue, such growth
rates are not sustainable. Such growth rates will decrease in the future and are
not indicative of actual growth rates that we may experience.



                                       12
<PAGE>   13

UNPREDICTABILITY OF FUTURE REVENUES; POTENTIAL FLUCTUATIONS IN QUARTERLY
OPERATING RESULTS; SEASONALITY

        We are unable to accurately forecast our future revenues because of our
limited operating history and the emerging nature of the markets in which we
compete. Revenues and operating results generally depend on the volume of,
timing of and ability to fulfill orders received. These factors have
historically been, and are likely to continue to be, difficult to forecast. Our
current and future expense levels are based largely on our operating plans and
estimates of future revenues and are, to a large extent, fixed. We may be unable
to adjust spending sufficiently quickly to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall in revenues in relation to our
planned expenditures would seriously harm our business, financial condition,
results of operations, and cash flows. Further, we may, from time to time, make
certain pricing, product, service or marketing decisions as a strategic response
to changes in the competitive environment. Such changes could seriously harm our
business, financial condition, results of operations, and cash flows.

        Our future quarterly operating results may vary significantly due to a
variety of factors, many of which are outside our control. Factors that could
affect our quarterly operating results include:

            -   Our ability to establish and expand brand awareness;

            -   Our ability to retain existing customers, attract new customers
                and continuously improve customer satisfaction;

            -   Announcements of, and market anticipation for, new technology
                offerings for which information resources may be sought;

            -   Our ability to manage inventory and fulfillment operations;

            -   Our ability to sustain or improve gross margin levels;

            -   The announcement or introduction of new online stores, services
                and products by us or our competitors;

            -   Price competition or higher wholesale prices in the industry;

            -   The level of usage of and commerce on the Internet and online
                services generally;

            -   Increasing customer acceptance of the Internet for the purchase
                of information resources such as those offered by us;

            -   Our ability to upgrade and develop our systems and
                infrastructure in a timely and effective manner;

            -   The level of traffic on our online store;

            -   The sales mix of our product offerings;

            -   Technical difficulties, system downtime or Internet brownouts;

            -   The amount and timing of operating costs and capital
                expenditures relating to expansion of our business, operations
                and infrastructure;

            -   The introduction of books, technology based training solutions,
                product manuals, research reports;

            -   The level of merchandise returns we experienced;

            -   Governmental regulation; and

            -   General economic conditions and economic conditions specific to
                the Internet, electronic commerce and the technical and
                professional resource industries.

        In the past, we have experienced seasonality in our business and we
expect that we will continue to experience such seasonality in the future.
Internet usage and the amount of purchases from individual and corporate
consumers tend to decline during August, November and December. During these
times many technical and business professionals are either absent from the
workplace, on vacation or experience a holiday closure at their company. Our
results in future quarters may be negatively affected by seasonal trends.

        Due to the foregoing factors, we cannot predict with any significant
degree of certainty our quarterly revenue and operating results. Further, we
believe that period-to-period comparisons of our operating results are not
necessarily a meaningful indication of future performance. It is likely that in
one or more future quarters our results may fall below the expectations of
securities analysts and investors. In such event, the trading price of the
Common Stock would likely be seriously harmed.



                                       13
<PAGE>   14

RISKS ASSOCIATED WITH ENTRY INTO NEW BUSINESS AREAS

        For the quarter ended April 30, 1999 approximately 81% of our online
revenues were derived from sales of books. We recently expanded our product
offerings to include technology based training materials, product manuals and
research reports and future revenues from these new product offerings are
difficult to forecast. Additionally, we expanded our focus to include resource
materials for professionals in the engineering, science, mathematics and
financial services industries and future revenues from these new areas are
difficult to forecast.

        We may choose to further expand our operations by promoting new or
complementary products and expanding the breadth and depth of products and
services offered. In addition, we may decide to utilize third-party
relationships to extend our brand or establish additional co-branded online
stores. We may pursue the acquisition of new or complementary businesses,
products or technologies. However, we have no present commitments or agreements
for any material acquisitions or investments. We may not be able to expand our
product offerings and related operations in a cost-effective or timely manner.
Such efforts may fail to increase online traffic and purchases from our online
or physical retail stores or to increase our overall market acceptance.
Furthermore, any new business or online store launched by us that is not
favorably received by individuals, corporate customers or their employees or
constituents could damage our reputation or the Fatbrain.com brand. Expansion of
our operations in this manner would also require significant additional expenses
and development, operations and editorial resources. Such efforts may strain our
management, financial and operational resources. The lack of market acceptance
of such efforts (including our recent expansion of product offerings to include
technology based training materials, manuals and research reports, as well as
our expanded focus in new industries) or our inability to generate satisfactory
revenues from such expanded services or products to offset related increased
costs could seriously harm our business, financial condition, results of
operations, and cash flows.

COMPETITION

        The electronic commerce market is new, rapidly evolving and intensely
competitive. The market for information resources is more mature but also
intensely competitive. We expect competition to continue to intensify in the
future. We currently or potentially compete with a variety of companies. These
competitors include:

            -   A significant number of traditional retail and online
                bookstores, including Amazon.com, Barnesandnoble.com, Borders
                Group, Inc. and other vendors of books, training products and
                product manuals;

            -   Various computer super-stores that carry related technical
                information resources at retail locations, in catalogs and over
                the Internet;

            -   A number of indirect competitors that specialize in electronic
                commerce or derive a substantial portion of their revenue from
                electronic commerce; and

            -   Other companies with substantial customer bases in the computer
                and other technical and professional fields.

        We may not be able to maintain a competitive position against current or
future competitors as they enter the markets in which we compete. This is true
particularly with respect to competitors with greater financial, marketing,
service, support, technical and other resources than Fatbrain.com. Our failure
to maintain a competitive position within the market could seriously harm our
business, financial condition, results of operations, and cash flows.

        We believe that the principal competitive factors on which it competes
in its market include:

            -   Brand recognition;

            -   Selection;

            -   Personalized services;

            -   Convenience;

            -   Price;

            -   Accessibility;

            -   Customer service;

            -   Quality of search tools;



                                       14
<PAGE>   15

            -   Quality of editorial and other site content; and

            -   Reliability and speed of fulfillment.

        Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than Fatbrain.com. In addition,
online retailers may be acquired by, receive investments from or enter into
other commercial relationships with larger, well-established and well-financed
companies as use of the Internet and other online services increases. Certain of
our competitors may be able to secure merchandise from vendors on more favorable
terms, devote greater resources to marketing and promotional campaigns, adopt
more aggressive pricing or inventory availability policies and devote
substantially more resources to Web site and systems development than the
Company.

        Increased competition may result in reduced operating margins, loss of
market share and a diminished brand franchise. We may from time to time make
certain pricing, service or marketing decisions or acquisitions as a strategic
response to changes in the competitive environment. Such actions could result in
reduced margins or otherwise seriously harm our business, financial condition,
results of operations, and cash flows.

        New technologies and the expansion of existing technologies may increase
the competitive pressures on the Company. For example, applications that select
specific titles from a variety of Web sites may channel customers to online
booksellers that compete with the Company. Companies that control access to
transactions through a network or Web browsers could also promote our
competitors or charge us a substantial fee for inclusion. In addition, vendors
of information resources such as technology based training materials could
provide direct access to training programs online. We may be unable to compete
successfully against current and future competitors, and competitive pressures
faced by us could seriously harm our business, financial condition, results of
operations, and cash flows.

MANAGEMENT OF EXPANDING BUSINESS; LIMITED SENIOR MANAGEMENT RESOURCES

        We have rapidly expanded our operations, and we anticipate that further
expansion will be required to address potential growth in our customer base and
market opportunities. Specifically, we expect to significantly increase our
direct corporate and telesales organization and marketing initiatives. This
expansion has placed, and future expansion is expected to place, a significant
strain on our management, operational and financial resources. Our new employees
include a number of key managerial, technical and operations personnel who have
not yet been fully integrated into the Company, and we expect to add additional
key personnel in the near future.

        To manage the expected growth of its operations and personnel, we will
need to improve existing and implement new transaction-processing, operational
and financial systems, procedures and controls. In addition, we will need to
expand, train and manage an increasing employee base. We will also need to
expand our finance, administrative and operations staff. Our management will be
required to maintain and expand our relationships with:

            -   Various suppliers;

            -   Freight companies;

            -   Other Web sites;

            -   Other Web service providers;

            -   Internet and other online service providers; and

            -   Other third parties necessary to our business.

        Our current and planned personnel, systems, procedures and controls may
be inadequate to support our future operations. Further, management may be
unable to attract, retain, motivate and manage required personnel or to
successfully identify, manage and exploit existing and potential market
opportunities. If we are unable to manage growth effectively, our business,
financial condition, results of operations, and cash flows could be seriously
harmed.

RISKS ASSOCIATED WITH NEW BRAND

We believe we must establish, maintain and enhance our "Fatbrain.com" brand. We
have only been operating under the "Fatbrain.com" name since the end of March
1999. To attract and retain online users and to promote and



                                       15
<PAGE>   16

maintain our new brand, we may need to substantially increase our marketing
expenditures to create and maintain strong brand loyalty among our customers.
Additionally, customers may react negatively to our new brand. Our business
could be adversely affected if our customers react negatively, our marketing
efforts are unproductive or if we cannot increase our brand awareness and
acceptance. If we fail to promote and maintain our brand, or if we incur
excessive expenses in an attempt to do so, our business, operating results,
financial condition and cash flows would be seriously harmed.

RISK OF CAPACITY CONSTRAINTS; RELIANCE ON INTERNALLY DEVELOPED SYSTEMS; SYSTEM
DEVELOPMENT RISKS

        A key element of our strategy is to generate a high volume of traffic
on, and use of, our online store. Accordingly, the satisfactory performance,
reliability and availability of the online store, transaction-processing systems
and network infrastructure are critical to our reputation. These factors are
similarly critical to our ability to attract and retain customers and maintain
adequate service and customer support levels. Our revenues depend on the number
of visitors who shop at our online store and the volume of orders we fulfill.
Any system interruptions that cause our online store to be unavailable or impair
order fulfillment performance would reduce the volume of goods sold and the
attractiveness of our product and service offerings. We have experienced
periodic system interruptions, which we believe will continue to occur from time
to time. If there is a substantial increase in the volume of traffic on our
online store or the number of orders placed by customers we will need to expand
and further upgrade our technology, transaction-processing systems and network
infrastructure. We may be unable to accurately project the rate or timing of
increases, if any, in the use of our online store or timely expand and upgrade
our systems and infrastructure to accommodate such increases.

        We use an internally developed system, which is supplemented by
commercially available licensed technology, for:

            -   Our online store;

            -   Search engine; and

            -   Substantially all aspects of transaction processing, including
                order management, cash and credit card processing, purchasing,
                inventory management and shipping.

        We intend to upgrade and expand our transaction-processing systems and
to integrate newly developed and purchased modules with our existing systems in
order to improve our accounting, control and reporting methods and support
increased transaction volume. We may be unable to add additional software and
hardware or to develop and further upgrade our existing technology,
transaction-processing systems or network infrastructure to accommodate
increased traffic through our online store or increased sales volume. Any
inability to do so may result in:

            -   Unanticipated system disruptions;

            -   Slower response times;

            -   Degradation in levels of customer service;

            -   Impaired quality and speed of order fulfillment; and

            -   Delays in reporting accurate financial information.

        We may be unable in a timely manner to effectively upgrade and expand
our transaction-processing system or to smoothly integrate any newly developed
or purchased modules with our existing systems. Any inability to do so could
seriously harm our business, financial condition, results of operations, and
cash flows.

NEED FOR ADDITIONAL PERSONNEL

        Our future success depends on our ability to attract, retain and
motivate highly skilled technical, managerial, editorial, merchandising,
marketing and customer service personnel. Competition for such personnel is
intense, particularly in the San Francisco Bay Area, where our headquarters are
located. As a result, we may be unable to successfully attract, assimilate or
retain qualified personnel. We have encountered difficulties in attracting a
sufficient number of qualified software developers for our online store and
transaction-processing systems. Further, we may be unable to retain those
developers we currently employ or attract additional developers. The failure to
retain and attract the necessary personnel could seriously harm our business,
financial condition, results of operations, and cash flows.



                                       16
<PAGE>   17

FULFILLMENT CENTER RELOCATION

         We moved our warehousing and fulfillment of orders to Erlanger,
Kentucky in May 1999 in order to be closer to certain publishers, wholesalers,
distributors and delivery services. At the same time we moved from a manual
distribution process to a software-supported solution from Manhattan Associates,
PKMS Warehouse Management System. Relocating such services and moving to an
automated distribution process may not result in operating efficiencies or may
cause a significant disruption in the fulfillment of orders, the distraction of
management and other key personnel and the expenditure of significant financial
and other resources. Any such disruption, distraction or expenditure could
seriously harm our business, results of operations, financial condition, and
cash flows.

SALES AND OTHER TAX COLLECTION

        We do not currently collect sales or other similar taxes in respect of
shipments of goods into states other than California and Kentucky. However, one
or more states or foreign countries may seek to impose sales tax collection
obligations on out-of-state or foreign companies, such as the Company, which
engage in electronic commerce. In addition, any new operations established by
the Company in states outside California and Kentucky could subject shipments
into such states to state sales taxes. A successful assertion by one or more
states or any foreign country that we should collect sales or other similar
taxes on the sale of merchandise could seriously harm our business, financial
condition, results of operations, and cash flows.

RISK OF SYSTEM FAILURE; SINGLE SITE AND ORDER INTERFACE

        Our success, in particular our ability to successfully receive and
fulfill online orders and provide high-quality customer service, largely depends
on the efficient and uninterrupted operation of our computer and communications
hardware systems. Substantially all of our computer and communications hardware
is currently located at a single leased facility in Sunnyvale, California, and
will be moved to a single leased facility in Santa Clara, California when we
relocate our corporate headquarters. Our systems and operations are vulnerable
to damage or interruption from a number of sources, including:

            -   Fire;

            -   Flood;

            -   Power loss;

            -   Telecommunications failure;

            -   Break-ins; and

            -   Earthquake and similar events.

        We have experienced minor and infrequent system interruptions in the
past. We do not presently have a formal disaster recovery plan and do not carry
sufficient business interruption insurance to compensate us for losses that may
occur. Despite the implementation of network security measures by the Company,
our servers are vulnerable to computer viruses, physical or electronic break-ins
and similar disruptions. Such disruptions could lead to interruptions, delays,
loss of data or the inability to accept and fulfill customer orders. The
occurrence of any of the foregoing risks could seriously harm our business,
financial condition, results of operations, and cash flows.

RELIANCE ON CERTAIN SUPPLIERS

        For the quarter ended April 30, 1999, we purchased approximately 40% of
our products from Ingram Book Company ("Ingram") and 20% of our products from
Pearson Education Division. We rely to a large extent on rapid fulfillment from
Ingram and other vendors. Barnes and Noble, Inc., one of our competitors, has
agreed to purchase Ingram Book Group, which owns Ingram. The bid is currently
under review by the Federal Trade Commission. We generally have no commitments
to or arrangements with any of our vendors that guarantee the availability of
merchandise, the continuation of particular payment terms or the extension of
credit limits. Our current vendors may not continue to sell merchandise to us on
current terms. In addition, we may be unable to establish new or extend current
vendor relationships to ensure acquisition of merchandise in a timely and
efficient manner and on acceptable commercial terms. If we were unable to
develop and maintain relationships with vendors that would allow us to obtain
sufficient quantities of merchandise on acceptable commercial terms, our
business, financial condition, results of operations, and cash flows would be
seriously harmed.



                                       17
<PAGE>   18

DEPENDENCE ON KEY PERSONNEL

        Our performance is substantially dependent on the continued services and
on the performance of our senior management and other key personnel. Our
performance also depends on our ability to retain and motivate our senior
management and other key employees. The loss of the services of any of our
executive officers or other key employees could seriously harm our business,
financial condition, results of operations, and cash flows.

        We have entered into employment agreements with several members of our
senior management, including:

            -   Mr. MacAskill, our President and Chief Executive Officer;

            -   Mr. Orumchian, our Vice President of Engineering;

            -   Mr. Alvarez, our Vice President of Finance and Chief Financial
                Officer; and

            -   Mr. Cudd, our Vice President of Marketing.

        Each employment agreement sets forth the officer's base salary and
general employee benefits, including acceleration of a portion of such
employee's Common Stock option vesting. We maintain $2.0 million of key person
life insurance on Chris MacAskill, our President and Chief Executive Officer.

DEPENDENCE ON CONTINUED GROWTH OF ELECTRONIC COMMERCE

        Our future revenues and profits, if any, substantially depend upon the
acceptance and use of the Internet and other online services as an effective
medium of commerce by our target customers. Rapid growth in the use of and
interest in the Internet, the Web and online services is a recent phenomenon. As
a result, acceptance and use may not continue to develop at historical rates and
a sufficiently broad base of consumers may not adopt, and continue to use, the
Internet and other online services as a medium of commerce. Demand and market
acceptance for recently introduced services and products over the Internet are
subject to a high level of uncertainty and there exist few proven services and
products. Our target customer has historically used traditional means of
commerce to purchase information resources. For us to be successful, these
customers must accept and utilize our online store to satisfy their information
resource needs.

        In addition, the Internet may not be accepted as a viable long-term
commercial marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. To the extent that the
Internet continues to experience significant expansion in the number of users,
frequency of use or bandwidth requirements, the infrastructure for the Internet
may be unable to support the demands placed upon it. In addition, the Internet
could lose its viability due to delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet
activity, or due to increased governmental regulation. Changes in or
insufficient availability of telecommunications services to support the Internet
also could result in slower response times and adversely affect usage of the
Internet generally and the Company in particular. Our business, financial
condition, results of operations, and cash flows would be seriously harmed if:

            -   Use of the Internet and other online services does not continue
                to increase or increases more slowly than expected;

            -   The infrastructure for the Internet and other online services
                does not effectively support expansion that may occur; or

            -   The Internet and other online services do not become a viable
                commercial marketplace.

RAPID TECHNOLOGICAL CHANGE

        To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our online operations. The
Internet and the electronic commerce industry are characterized by:

            -   Rapid technological change;

            -   Changes in user and customer requirements and preferences;

            -   Frequent new product and service introductions embodying new
                technologies; and

            -   The emergence of new industry standards and practices.



                                       18
<PAGE>   19

        The evolving nature of the Internet could render our existing online
store and proprietary technology and systems obsolete. Our success will depend,
in part, on our ability to:

            -   License leading technologies useful in our business;

            -   Enhance our existing services;

            -   Develop new services and technology that address the
                increasingly sophisticated and varied needs of our current and
                prospective customers; and

            -   Respond to technological advances and emerging industry
                standards and practices on a cost-effective and timely basis.

        The development of our Web site and other proprietary technology entails
significant technical and business risks. We may not successfully use new
technologies effectively or adapt our online store, proprietary technology and
transaction-processing systems to customer requirements or emerging industry
standards. If we are unable, for technical, legal, financial or other reasons,
to adapt in a timely manner, in response to changing market conditions or
customer requirements, our business, financial condition, results of operations,
and cash flows could be seriously harmed.

ELECTRONIC COMMERCE SECURITY RISKS

        A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. We rely on
encryption and authentication technology licensed from third parties to provide
the security and authentication necessary for secure transmission of
confidential information, such as customer credit card numbers. Advances in
computer capabilities, new discoveries in the field of cryptography, or other
events or developments may result in a compromise or breach of the algorithms
used by us to protect customer transaction data. If any such compromise of our
security were to occur, it could seriously harm our reputation, business,
financial condition, results of operations, and cash flows. A party who is able
to circumvent our security measures could misappropriate proprietary information
or cause interruptions in our operations.

        We may be required to expend significant capital and other resources to
protect against such security breaches or to alleviate problems caused by such
breaches. Concerns over the security of the Internet and other online
transactions and the privacy of users may also inhibit the growth of the
Internet and other online services generally, and the Web in particular,
especially as a means of conducting commercial transactions. To the extent that
activities of the Company or third-party contractors involve the storage and
transmission of proprietary information, such as credit card numbers, security
breaches could damage our reputation and expose us to a risk of loss or
litigation and possible liability. Our security measures may not prevent
security breaches and failure to prevent such security breaches may seriously
harm our business, financial condition, results of operations, and cash flows.

RISKS ASSOCIATED WITH INTERNATIONAL SALES

        For the quarter ended April 30, 1999, international sales accounted for
approximately 17% of our online revenue. We expect that our percentage of online
revenue from international markets will continue to represent a significant
portion of our total revenue. Our international business activities are subject
to a variety of potential risks, including the adoption of laws, political and
economic conditions and actions by third parties that would restrict or
eliminate our ability to do business in certain jurisdictions. Although we
currently transact business in U.S. dollars, to the extent that we determine to
transact business in foreign currencies, we will become subject to the risks
attendant to transacting in foreign currencies, including potential adverse
effects of exchange rate fluctuations.

YEAR 2000 COMPLIANCE

        Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field and cannot
distinguish dates in the 1900's from dates in the 2000's. This could result in
system failures or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities. As a result, many companies'
software and computer systems may need to be upgraded or replaced in order to
comply with such "Year 2000" requirements. Although we believe that our products
and internal systems are Year 2000 compliant, we utilize third-party equipment
and software that may not be Year 2000 compliant. Failure of such third-party
equipment or



                                       19
<PAGE>   20

software to operate properly with regard to the Year 2000 and thereafter could
require us to incur unanticipated expenses to remedy any problems, which could
seriously harm our business, operating results, financial condition and cash
flows.

        Any failure by the Company to make its products Year 2000 compliant
could result in:

            -   A decrease in sales of our products;

            -   An increase in the allocation of resources to address Year 2000
                problems of our customers without additional revenue
                commensurate with such dedication of resources; and

            -   An increase in litigation costs relating to losses suffered by
                our customers due to such Year 2000 problems.

        Furthermore, the purchasing patterns of customers or potential customers
may be affected by Year 2000 issues as companies expend significant resources to
correct their current systems for Year 2000 compliance. These expenditures may
result in reduced funds available to purchase products and services such as
those offered by us, which could seriously harm our business, operating results
and financial condition. We have conducted a preliminary review of our internal
computer systems to identify the systems that could be affected by the Year 2000
issue and to develop a plan to resolve the issue. Based on this preliminary
review, we currently have no reason to believe that our internal software
systems are not Year 2000 compliant. However, we will continue to evaluate our
systems and in the event we conclude that our systems are not Year 2000
compliant, we will develop a contingency plan to address these issues. There can
be no assurance that Year 2000 compliance issues will not have a material
adverse effect on the Company.

TRADEMARKS AND PROPRIETARY RIGHTS; UNLICENSED ARRANGEMENTS AND MATERIALS

        We regard our copyrights, service marks, trademarks, trade dress, trade
secrets and similar intellectual property as critical to our success. Further,
we rely on trademark and copyright law, trade secret protection and
confidentiality and license agreements with our employees, customers, partners
and others to protect our proprietary rights. We pursue the registration of our
trademarks and service marks in the U.S. and internationally, and have applied
for the registration of certain of our trademarks and service marks. Effective
trademark, service mark, copyright and trade secret protection may not be
available in every country in which our products and services are made available
online. While we attempt to ensure that the quality of our brand is maintained
by such licensees, such licensees may take actions that could seriously harm the
value of our proprietary rights or reputation and in turn our business,
financial condition, results of operations, and cash flows. The steps taken by
the Company to protect our proprietary rights may not be adequate and third
parties may infringe or misappropriate our copyrights, trademarks, trade dress
and similar proprietary rights.

        In addition, other parties may assert infringement claims against us.
Such claims, even if not meritorious, could result in the expenditure of
significant financial and managerial resources. We are not currently aware of
any legal proceedings pending or threatened against us. In addition, we display
reviews and articles on technical subjects in our online store. Some reviews and
articles may be copyrighted and we may not have explicit permission from the
author for use of such intellectual property. The authors may assert
infringement claims against the Company. If a claim is asserted alleging that we
have infringed the proprietary rights of a third party, we may be required to
seek licenses to continue to use such intellectual property. The failure to
obtain the necessary licenses or other rights at a reasonable cost could
seriously harm our business, financial condition, results of operations, and
cash flows.

GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES

        We are not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
generally, and laws or regulations directly applicable to access to electronic
commerce. However, due to the increasing popularity and use of the Internet, it
is possible that a number of laws and regulations may be adopted with respect to
the Internet, relating to:

            -   User privacy;

            -   Pricing;

            -   Content;

            -   Copyrights;



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<PAGE>   21

            -   Distribution; and

            -   Characteristics and quality of products and services.

        Furthermore, the growth and development of the market for electronic
commerce may prompt calls for more stringent consumer protection laws that may
impose additional burdens on those companies conducting business online. The
adoption of any additional laws or regulations may decrease the expansion of the
Internet. A decline in the growth of the Internet could decrease demand for our
products and services and increase our cost of doing business, or otherwise
seriously harm our business, financial condition, results of operations, and
cash flows. Moreover, the applicability to the Internet of existing laws in
various jurisdictions governing issues such as property ownership, sales tax,
libel and personal privacy is uncertain and may take years to resolve. Our
business, financial condition, results of operations, and cash flows could be
seriously harmed by:

            -   Any such new legislation or regulation;

            -   The application of laws and regulations from jurisdictions whose
                laws do not currently apply to our business; or

            -   The application of existing laws and regulations to the Internet
                and other online services.

        As our service is offered over the Internet in multiple states and
foreign countries, such jurisdictions may claim that we are required to qualify
to do business as a foreign corporation in each such state and foreign country.
The failure by the Company to qualify as a foreign corporation in a jurisdiction
where it is required to do so could subject us to taxes and penalties for the
failure to qualify. It is possible that the governments of other states and
foreign countries also might attempt to regulate the content of our online store
or prosecute us for violations of their laws. Violations of local laws may be
alleged or charged by state or foreign governments. Further, we might
unintentionally violate such laws and such laws may be modified and new laws may
be enacted in the future.

        In addition, several telecommunications carriers are seeking to have
telecommunications over the Internet regulated by the Federal Communications
Commission (the "FCC") in the same manner as other telecommunications services.
The growing popularity and use of the Internet has burdened the existing
telecommunications infrastructure and many areas with high Internet use have
begun to experience interruptions in phone service. As a result, local exchange
carriers have petitioned the FCC to regulate Internet Service Providers ("ISPs")
in a manner similar to long distance telephone carriers and to impose access
fees on the ISPs. If any effort to increase regulation of ISPs is successful,
the expense of communicating on the Internet could increase substantially,
potentially slowing the growth in the use of the Internet. Any such new
legislation or regulation or application or interpretation of existing laws
could seriously harm our business, financial condition, results of operations,
and cash flows.

POSSIBLE VOLATILITY OF STOCK PRICE

        The trading price of the Common Stock is likely to be highly volatile
and could be subject to wide fluctuations in price in response to such factors
as:

            -   Actual or anticipated variations in quarterly operating results;

            -   Announcements of technological innovations;

            -   New sales formats or new products or services by us or our
                competitors;

            -   Changes in financial estimates by securities analysts;

            -   Conditions or trends in the Internet and electronic commerce
                industries;

            -   Changes in the market valuations of other Internet, online
                service or retail companies;

            -   Announcements by us of significant acquisitions, strategic
                partnerships, joint ventures or capital commitments;

            -   Additions or departures of key personnel;

            -   Sales of Common Stock; and

            -   Other events or factors, many of which are beyond the Company's
                control.

        In addition, the stock market in general, and the Nasdaq National Market
and the market for Internet-related and technology companies in particular, has
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of such companies. The trading
prices of



                                       21
<PAGE>   22

many technology companies' stocks are at or near historical highs and reflect
price earnings ratios substantially above historical levels. These trading
prices and price earnings ratios may not be sustained. These broad market and
industry factors may seriously harm the market price of the Common Stock,
regardless of our operating performance. In the past, following periods of
volatility in the market price of a company's securities, securities
class-action litigation has often been instituted against such company. Such
litigation, if instituted, could result in substantial costs and a diversion of
management's attention and resources, which would seriously harm our business,
financial condition, results of operations, and cash flows.

ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS AND DELAWARE LAW

        The Company's Board of Directors has the authority to issue up to
5,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the stockholders. The rights of the
holders of Common Stock will be subject to, and may be seriously harmed by, the
rights of the holders of any Preferred Stock that may be issued in the future.
The issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders and may seriously harm the voting and other rights of the holders
of Common Stock. We have no present plans to issue shares of Preferred Stock.
Further, certain provisions of our Second Amended and Restated Certificate of
Incorporation and Delaware law could delay or make more difficult a merger,
tender offer or proxy contest involving the Company.



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<PAGE>   23

PART II.       OTHER INFORMATION

ITEM 1.        LEGAL PROCEEDINGS.

               None

ITEM 2.        CHANGES IN SECURITIES

               Not applicable

ITEM 3.        DEFAULTS UPON SENIOR SECURITIES

               Not applicable

ITEM 4.        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

               None

ITEM 5.        OTHER INFORMATION

               Not applicable

ITEM 6.        EXHIBITS AND REPORTS ON FORM 8-K.

               (a) The following exhibit is filed as part of this report:

                   27.01 --- Financial Data Schedule

               (b) Reports on Form 8-K

                   No Reports on Form 8-K were filed during the quarter ended
                   April 30, 1999.



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<PAGE>   24

                                   SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

June 11, 1999                           FATBRAIN.COM, INC.
                                        (Registrant)



                                        By:      /s/ Donald P. Alvarez
                                           -------------------------------------
                                           Donald P. Alvarez
                                           Vice President of Finance and
                                           Administration and Chief Financial
                                           Officer (Duly Authorized Officer and
                                           Principal Financial Officer)



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